The market 'got ahead of itself' in expecting interest-rate cuts, according to a BlackRock strategist who warned the Fed would 'stay hawkish'

• A BlackRock strategist said the markets were too confident the Fed would rein in interest rates.
• Calls for the Fed to do this have driven the bullishness in the markets in 2023 so far.
• But BlackRock's Ben Powell told Bloomberg the Fed would likely "stay hawkish" on rates.

A senior BlackRock strategist has warned that the Fed is likely to "stay hawkish" on interest rates, adding the markets' confidence that they would fall was misplaced.

As the impact of last year's rates rises filter into the economy, the Fed is now facing calls to rein in or even reverse its hawkish stance on monetary policy.

Ben Powell, BlackRock's chief APAC investment strategist, told Bloomberg that the investment group was "underweight" on US and European stocks because markets were too confident that the Federal Reserve would cut interest rates earlier than initially expected.

But Powell said that recent data – suggesting that inflation was slowing — wasn't likely to soften Fed chair Jerome Powell's stance ahead of this week's Federal Open Market Committee Meeting, where rates are expected to rise by 25 basis points.

The strategist said the Fed Chair "is very likely to remind the market that the Fed's plan is to stay hawkish, to go to 5%, maybe even higher, and then critically to stay there."

"We think the market's got ahead of itself, at least in the West. We would therefore be a little bit cautious," he told Bloomberg Monday morning.

In a research note published last week, BlackRock said developed markets weren't prepared for the possibility of a recession as interest-rate rises begin to take effect. 

BlackRock added that inflation in the US was more likely to settle at 3% rather than the Fed's target of 2%, with the fall driven mainly by consumers' return to prioritizing services over goods after the pandemic.

"Longer-term trends like aging demographics, geopolitical fragmentation and the energy transition mean inflationary pressures will be higher than in the past," the note said.